The various organs of the European Union have decided to kick their sweeping reform of the insurance sector down the road for an additional two years because of a massive blunder. Solvency II, a European Union directive (equivalent to an Act) designed to introduce a risk-based insurance prudential and supervisory regime and replace the 14 insurance and reinsurance EU directives currently in place, is now officially 'on hold'.

The various organs of the European Union have decided to kick their sweeping reform of the insurance sector down the road for an additional two years because of a massive blunder. Solvency II, a European Union directive (equivalent to an Act) designed to introduce a risk-based insurance prudential and supervisory regime and replace the 14 insurance and reinsurance EU directives currently in place, is now officially 'on hold'. It became EU law in 2009 and was to go into force in all countries (which were supposed by now to have enshrined it in their national laws) on 1 January 2014. Now an EU functionary called Michel Barnier is rushing through a directive to postpone this to 1 January 2016. His press office told Wealth Briefing that this heavy-handed postponement technique was 'the only way to do it and very rare.'

The issue here revolves around calibrations for insurance products with long-term guarantees, some of which are suitable for high-net-worth individuals. Solvency II contains such calibrations, but some time ago the European Insurance and Occupational Pensions Authority came out with a report which damned these as inferior and proposed an upgrade. Barnier held these new calibrations to be 'excellent' and embarked on a campaign to enact them before Solvency II came in. The result of this, and of impending changes in the EU's structure wrought by its Lisbon Treaty, was 'Omnibus II', a draft directive which, among other things, proposed to introduce the better set of calibrations before Solvency II came into effect everywhere in the EU. It failed due to the usual internecine EU wrangles and Solvency II has consequently been called off to spare financial institutions the cost of implementing the wrong set of technical standards.

EIOPA's calibrations were on the subject of: a matching adjustment; an extended version of the same; a premium that works against cyclical tendencies in the economy; the extrapolation of the long-term interest rate; two transitional measures, details unknown; an extension of the recovery period; and a new element called a volatility balancer, which builds on the results for the other elements, especially the anti-cyclical premium.

With innumerable delays plaguing Solvency II already, one regulator is 'going it alone.' L'autorité de Contrôle Prudentiel, the French regulator, plans to start its own brand of Solvency II reporting in 2014. This is not usual for such a reactive regulator but it has told the press that it believes that such an important project ought not to be abandoned and that a gesture of trust such as this is important. Pillar 3 reporting in XBRL (the software beloved of regulators everywhere) will commence in the New Year. No other regulator seems to have followed suit so far.

Firms, too, have built endemic delay into their work-plans. Bruce Porteous, Head of Solvency II at Standard Life, recently told the press that he was always performing tests to help him decide what to do in the event of further delays. He told one journal that his firm was timing its asset quality and governance systems reforms for 1 January 2014 come what may, while thinking of delaying reporting and other requirements.

Insurance regulation focuses on the long-term capacity of insurers to meet claims as they fall due. The job of the regulator is to find ways to monitor this capacity at various points, the better to know when to jump in and issue remedial orders. The EU's regime for achieving this on a risk-based basis is not so quick. Omnibus II, according to Barnier's press officer, is expected to become EU law 'by Christmas at least.' We have heard this before.